Budget 2013 should focus on domestic demand, local investors

As foreign investors bite their nails wondering what goodies P Chidambaram will offer on 28 February (even as he himself is probably losing sleep over the growing current account deficit), there are some who feel the government’s obsession with the F word should end.

“I am not fully convinced that the only solution to the problems of the economy is to focus on the foreign investor alone,” says R Kavita Rao, professor at the National Institute of Public Finance and Policy. She wants North Block to focus on the domestic investor and domestic demand. “We should be a bit more inward looking, worry a little less about the current account deficit.”

A large current account deficit (when a country spends more foreign exchange than it earns) weakens the rupee and leads to a fall in the country’s foreign exchange reserves. More foreign investment means more dollars to shore up these reserves.

Rao wants the government to figure out how to execute deals that will translate into results on the ground – more roads and more powers

But Rao isn’t advocating a return to the autarchic model of yore, with its wariness of foreign money and shibboleths of self-sufficiency. The world economy isn’t exactly buoyant, she points out, and domestic demand is what will drive investment. That demand is large enough for foreign investors to come in without the red carpet being rolled out for them. The focus must get back to the domestic economy than the international economy, she insists.

Actually what she would like to see topping Chidambaram’s agenda to pep up the economy is infrastructure. Several major initiatives to push investments into this sector, she points out, haven’t quite taken off. She wants the government to figure out how to execute deals that will translate into results on the ground – more roads and more power. “I would focus on infrastructure and domestic investor.”

Tax breaks are not necessarily the way to do this, says Rao, who was part of a 2005 NIPFP study that estimated the revenue loss from a plethora of tax exemptions. There has been “a little progress”, she says, on withdrawing exemptions – time-bound ones are not being renewed. “But there’s nothing much beyond that.”

Corporate India’s constant clamour for tax sops perhaps stems from the government being unable to deliver on other areas like infrastructure. “We need to establish the credibility that the government can deliver on other fronts as well. Unless you do that, it will be a bit of a hardsell to say we’ll build roads so don’t ask for tax exemption.” She finds it unfortunate that even tax officials think exemptions are the only way to attract investments. “We’ve got into a mindset that the only instrument the government should be using is taxation. In which case close the rest of the government down.”

The sorry state of government finances is something that needs to be addressed and Rao doesn’t see this happening through expenditure cuts, in view of the elections in 2014. In the short term, she says, the focus will be on getting more revenues. She pitches for reverting to dividends – currently taxed at 15 percent in the hands of the company – being taxed in the hands of the taxpayer. The bulk of dividends, she points out, goes to individuals who would otherwise be taxed at 30 percent.

Rao headed a team that recently submitted a report estimating the extent of black money. Though she won’t discuss the report – and rubbishes media reports that black money equals 10 percent of GDP – she says the problem can be checked only be augmenting the capacity of the tax department to ferret out defaulting and potential tax payers. Reducing tax rates and not toning up administration won’t help. “If I believe I can’t be caught I don’t care. Even 10 percent is more money in my pocket.”

Chidambaram’s third priority, Rao says, should be to send out clear signals on the Goods and Services Tax (GST). Rao feels it is necessary to give taxpayers a clear idea about what GST represents. The general perception, she points out, is that it will be one uniform tax and that those coming under its ambit will have to deal with just one administrative authority. “But we are not yet there.”

Rao laments the fact that no one is even acknowledging that how GST will be administered is an issue. For the taxpayer, she notes, this is as much an issue as the tax rates. As for rates, she would like to see a statement that GST is not going to be one homogenous levy. There will be variations in rates across states, she points out. “If you are not going to allow for any variations, GST is not going to happen. States are well fixated on the idea that they have autonomy in the present regime and they would like to retain that autonomy.”